Wednesday, 30 January 2019

So yesterday most of
the Conservative party found unity, by once again believing in a
unicorn. The unicorn that the EU would allow the UK to unilaterally
end the backstop. Of course a backstop that one side can end without
that side being in the Customs Union and Single Market for goods is
not a backstop at all. Alternative arrangements to avoid a hard
border in Ireland did not exist when the UK was negotiating with the
EU and they still do not exist. If you wanted an illustration of how
stupid this country looks to those overseas here it is. If you want
to see how implicated the right wing press is in this stupidity look
at the headlines today: Mail - “Theresa’s Triumph”, Express -
“She’s Done It”.

Why did the Prime
Minister and her party indulge in this fantasy? Because it runs down
the clock. May wants to run down the clock because she thinks, with
good reason, that in the end parliament will vote for her deal. The
ERG wants to run down the clock because it wants No Deal. What we saw
yesterday was the willingness of the Prime Minister to look
completely stupid over the next week or so banging her head against
an EU brick wall just to avoid compromising on her red lines.

What was new and
much more worrying about last night is that we learnt there was a new
block in parliament. This block will vote to stop parliament doing
anything to try and find an alternative to May’s deal. We already
knew that the ERG and May’s block would do that, but they were
short of a majority. They got a majority last night thanks to 14Labour MPs. If this continues, it will prevent parliament coming up
with any alternative to May’s deal that can command a majority.
That just leaves May’s deal and No Deal left as we approach 29th
March.

But surely, you may
be asking, how can May’s deal win when it was so decisively
rejected last time? The ERG will continue to vote against it, because
they want No Deal. But will Labour MPs and Tory rebels still vote
against it if that inevitably means No Deal? I doubt it. Anyone
voting against May’s Deal when it is the only alternative to No Deal would get blamed for the chaos of No Deal. Instead Labour will
choose abstention, allowing May’s block to beat the ERG block and
May’s deal to pass.

If this happens, no
one comes out of this well. The ERG really do hate an all UK
backstop. May will have her negotiating credibility torn to pieces
before she has to do a trade deal with the EU, in a situation
where the UK is once again fighting against the clock (the end of
transition). Labour will have not voted against the deal
they committed to voting against. But the institution that would lose
most with this outcome is parliament itself. It had an opportunity to
take control from a bankrupt government and it failed. While it is tempting to blame the 14 Labour MPs, the real problem is that the majority of Conservative MPs are prepared to seriously damage the economy, make the UK an international laughing stock and risk the chaos of No Deal just to preserve the unity of their deeply flawed party.

Monday, 28 January 2019

If you talk to
almost anyone overseas, except those at the right wing extreme (like
Trump) or part of a tiny minority of the left, their reaction to
Brexit is similar to the former
Prime Minister of Finland. What the UK is doing is utterly, utterly
stupid. An act of self harm with no point, no upside. Now sometimes
outside opinion is based on incomplete or biased information and
should be discounted, but on Brexit it is spot on. So why are so many
people in the UK unable to see what outsiders can see quite clearly.

The days when
Leavers were talking
about the sunlit uplands are over. Liam Fox has not even managed to
replicate the scores of trade deals the UK will lose when we leave
the EU. As to independence, Leavers just cannot name any laws that
the EU imposed on the UK they do not like. Since the referendum even
public attitudes to immigration have become much more favourable.

Instead there has
emerged one justification for reducing real wages, for allowing our
economy to lose over
2% of its GDP, to allow firms to make plans and enact plans to leave
the UK: the 2016 referendum. People voted for it so it has to be
done. It is described as the will of the people. Yet few bother to
note that almost half the people voted the other way, with those that
would be most affected not even having a vote, and that this victory
was won by illegal means. All that is brushed aside.

But what is really
remarkable is the way what this vote was for has gradually mutated
over time. Just before the
vote, the Leave campaign talked of many ways of leaving, with Norway
(which is in the EEA) as one option. They did this for a simple
reason:
every time Leavers came up with a feasible way of leaving other
Leavers did not like it. Yet within little more than a year Leavers
were declaring that the vote was obviously to leave both the Customs
Union and Single Market. During the referendum campaign the Leave
side talked about the great deal they would get from the EU, but
within two years many of the same people were seriously pretending
that voters really wanted No Deal. A vote for the ‘easiest’ deal
in history has become a vote for no deal at all, apparently.

In much the same
way, as Alex Andreounotes,
what was once described as Project Fear transforms in time into ‘the
people knew they were voting for that’. Claims there will be no short term
hit to living standards made before the referendum has now become
people knew there would be a short term cost. (Remember Rees-Mogg
told us that short term means 50 years.)

Meanwhile warnings
from important UK businesses become an excuse to talk about WWII, yet
again. What people from outside the UK can see that too many inside
cannot is how the case for Leaving has become little more than
xenophobia and nationalism. What people overseas can also see but we
seem unable to is that there is a world of difference between a vote
to Leave the EU in an unspecified way and a real, practical plan.
Which means that the first referendum, particularly as it was
narrowly won, needs to be followed by a second referendum over an
actual, realistic way of leaving. In other words a People’s Vote.
When Jonathan Freedland says
“the notion that a 52% vote for a hypothetical, pain-free Brexit
translates into an unbreakable mandate for an actually existing
Brexit is shaky at best” he is wrong: the notion is simply wrong.

Some of the
arguments against this are so dumb, yet are allowed to pass as
serious. ‘Why not the best of three’: there is no reason for a
third referendum. ‘The first referendum was an unconditional vote
to leave’: of course it could never be. [1] Suppose we found out
that everyone would lose half their income under any specific way of
leaving - would you still argue that in 2016 voters voted for that?
Or that a second referendum means
that ‘politicians have failed the people’. Most politicians voted
to Remain because they knew that any realistic way of leaving would
be bad for people. They have been proved right and a majority of the
electorate might well agree.

But by far the worst
excuse not to hold a People’s Vote is that a second referendum
would be undemocratic. Orwell must be turning in his grave when he
hears politicians say in all seriousness that a second referendum
would undermine faith in democracy. This is the language of dictators
and fascists, but few seem to mind. Given the difference between the
final deal and the promises of the Leave campaign the case for a
second referendum is overwhelming, but you would not know that from
the UK public debate. There is only one way to make sense of the
‘People’s Vote = undemocratic’ equation, or the ‘will of the
people’, and that is that the first referendum effectively
disenfranchised Remain voters. [2]

That is exactly what
happened after the 2016 vote. Those wanting to Remain to all intents
and purposes ceased to exist. If we are just talking about Leave
voters, then of course most will be disappointed by a second vote. Is this why Labour MPs just worry about Leave voters in their constituencies,
because Remain voters no longer matter? It is why we get endless Vox
pops from Leave constituencies, and no mention from EU citizens who
have lived here for years who are worried
sick because the computer might say you have to leave.

How did Remain
voters get effectively disenfranchised? Why is the lunacy of what
this country is doing only apparent to foreigners? Answering this
question is not hard for anyone who has read my book
‘The Lies We Were Told’. What we have that foreigners do not is a
public discourse shaped by a handful of newspaper proprietors who
just happen [3] to be intensely hostile to the EU. Partly through
intimidation by that same press and their political allies, the BBC
follows this discourse. This is where the ‘will of the people’
came from. It was this press that puts rebel Conservative MPs on
their front pages, and that uses language like saboteurs and
traitors. It is intimidating MPs in order to influence the democratic process, but of course few in the media call it that.

As I discuss in my
book, I have seen this before in a milder form at least twice in
recent times. In the first the UK convinced itself that austerity was
the only way forward, despite most academic economists saying
otherwise. It was the media that promoted claims that governments
were just like households, even though first years economics students
are taught why this is not true. And then it was the media that
pushed (or left unchallenged) the idea that austerity was the result
of Labour profligacy: it was a straight lie but it played a critical
part in the 2015 election.

If people have
doubts about my argument that the media played a central role is
misdirecting the public then (and many do), well Brexit should be a
test case. And so far Brexit has gone exactly as these newspaper
proprietors would have wished. Three coincidences is a row? The reason why those
overseas can see that Brexit is utterly, utterly stupid while the UK
stockpiles food and medicine, and the Prime Minister tries to
blackmail MPs into supporting her deal, is because those overseas are
not influenced by the UK media.

[1] As this one
seems very popular, it is worth spelling out why it is rubbish. The
2016 referendum was not some kind of contract, where all those voting
to leave committed to support any vote to leave for all time. It is
highly likely that some people voted for a particular kind of Brexit
and would prefer Remain to other types of Brexit, which is crucial
given the narrow victory. (Which is also why claims that Remain
cannot be on any second referendum ballot are also nonsense.) Some
may have voted Leave to give more money to the NHS and to stop
Turkish immigrants, in which case they may have changed their minds. It does not say "we should leave whatever the form of leave at whatever cost" on the ballot or the small print, because there is no small print.

[2] There is a
serious and quite compelling argument that referendums in a
representative democracy are a bad idea, but this equation is about a
referendum that has been necessitated by an ambiguous first
referendum.

Thursday, 24 January 2019

When people complain
that neoliberalism is a meaningless concept, I should point them to
what has happened to the top rate of income tax since around 1980,
not just in the US and UK but elsewhere. (Source
HT Marcel Fratzscher)

Here is a chart of the United States top tax rate over the last
century (HT Martin Sandbu). Eisenhower had top earners paying a 91
percent marginal rate.

No doubt there are complex reasons for these reductions, but key
among them has to be a neoliberal belief that cutting top rates would
lead to more dynamic CEOs who would produce more dynamic companies,
and the benefits of this would trickle down to the economy as a
whole. Low top tax rates would encourage entrepreneurs to take more
risks that were socially beneficial and so on. The argument is so
familiar, trotted out routinely by right wing think tanks, it hardly
needs elaborating. It is a classic example of neoliberals using a bit
of simple economics to justify policy that is advantageous to
themselves or their paymasters.

Yet the evidence for such an effect is weak,
at best. The intuition for why it should be weak is straightforward.
Above a certain level of income, other incentives beyond the purely
pecuniary become important. Top CEOs, like top footballers, want to
be successful at what they do, and more successful than others. They
will want success whatever the overall financial rewards of being
successful.

Another bit of basic economics that neoliberals hardly ever mention
is the diminishing marginal utility of consumption. This implies
quite the opposite of low tax rates at the top. It is socially much
more beneficial to tax those to whom one dollar is not worth the
effort of picking off the sidewalk and transfer it to those who are
poorer. A well known paper
by Diamond and Saez found that, after allowing for disincentive and
avoidance effects, the optimal top rate of income tax in the US
should be 73%. [1] [2]

There are two reasons why even 73% might be an underestimate.
Piketty, Saez and Stantcheva have argued
that giving CEOs lots of money can have negative incentive effects.
The CEOs start putting effort into increasing their salary rather
than improving their firm. Part of your status comes from what you
can afford. When all CEOs are taxed a lot at the margin the size of
your salary has little impact on that, but when your salary is not
taxed so much you can increase your salary and theefore status by
extracting more from your own firm. To use some economics jargon, a
low marginal tax rate on top incomes can be a good example of an
incentive for rent extraction rather than an incentive for increasing
social output. .

But while an extra dollar for a CEO is not going to incentivise them
in a positive way very much, you could argue that it incentivises
those with talent to aspire to be CEOs. CEOs are always going to be
among the richest in society, because a lot of their income will be
taxed at lower rates. A paper
by Lockwood, Nathanson and Weyl turns that argument on its head. High
salaries are associated with activities, like finance and law, that
have what economists would call negative externalities, which means
that they do much less good for society than the size of the salaries
they pay might suggest. A lot of finance, for example, is about
trying to take money off other people rather than growing the size of
the overall pie. If high post-tax salaries incentivise talented
people into those professions, that is negative for society, which
would benefit if they worked in different jobs. You can reduce this
misallocation of talent by having higher tax rates on top
incomes.

Neoliberals have one last line of defence against raising top tax
rates in a single country, and that is migration. The argument is
that talent, which could be quite mobile, will move to where talent
is most rewarded. There is clear evidence that this is true, to an
extent.
This concern does not mean we leave top tax rates where they
currently are or even reduce them, but simply that we might not put
them up as high as they should otherwise go while some countries that
are attractive to talent continue to have low tax rates on top
incomes. Sweden seems
to do pretty well with a 70% effective top tax rate.

This danger of a race to the bottom with top tax rates makes it all
the more important that the United States raises it’s top marginal
tax rate, along the lines recently suggested
by Democrat Alexandria Ocasio-Cortez. For various
fairly obvious reasons the US does not need to worry too much about a
talent drain if it raised top tax rates.

In my view the arguments for higher top tax rates are at least as
much non-pecuniary, by which I mean they do not depend on the points
raised so far. The evidence that social welfare is higher in more
equal societies seems compelling to me. In other words we should
increase top tax rates just because that helps produce a more equal
society. I have seen a few attempts to debunk the evidence for this
in The
Spirit Level, but they are not convincing as a collective, while
there is even more evidence to support the idea that people are
happier in more equal societies..

There is a final
argument for high tax rates at the top which seems particularly
relevant to the US and UK at the moment. If you have a political
system like the US where money easily buys political influence, you
will find some of those who earn very high salaries trying to do
exactly that (some references here).
You can create the kind of plutocracy I discuss here.
Because money can also help to buy votes, that plutocracy may also be
able to continue with democratic elections without in any way
threatening the plutocracy. Even when you have laws limiting the
amount that can be spent on elections, the UK shows there are ways
for the rich to get around that, particularly if they control large
sections of the press.

This is the argument made in this
excellent NYT op-ed by Emmanuel Saez and Gabriel
Zucman. They write

“An extreme concentration of wealth means an extreme concentration
of economic and political power. Although many policies can help
address it, progressive income taxation is the fairest and most
potent of them all, because it restrains all exorbitant incomes
equally, whether they derive from exploiting monopoly power, new
financial products, sheer
luck or anything else.”

“most rich people I know would have been happy to spend vast sums
of money to keep Mr Trump out of the White House. And many tried. The
Trump phenomenon is not an argument that the moneyed elites have too
much influence on politics. If anything, it is an argument that they
have too little.”

But this misunderstands (as some on the left do) the nature of the
plutocracy that super incomes and wealth create. It does not, as I
make clear here,
create a kind of committee of the very rich that between them decide
who rules. It is much more erratic than this. Instead it allows small
groups among the very wealthy, who may be quite unrepresentative, to
hijack a democratic system. Trump and Brexit are clear examples.
Mankiw is right that one way to avoid that would be to create a more
representative kind of plutocracy, but a far better way of avoiding
disasters of this kind is to deal with the problem at its source, by
reinstating high rates of tax on top incomes.

[1] Some intuition on this number. If disincentive and avoidance
effects were so large that an increase in tax rates led to no
additional income, then there is no pecuniary advantage from doing
so. If these effects did not exist, the optimal marginal rate at the
top would be 100%. The paper estimates these effects are somewhere
between these two extremes, so the optimum tax rate at the top will
be between zero and 100%.

[2] For a discussion of these issues in a UK context, see https://www.ifs.org.uk/publications/9678. Note that HMRC calculations that the short-lived raising of the UK top tax rate to 50% did not raise any revenue involve debatable assumptions, and much of the avoidance only worked because the hike was temporary.

Monday, 21 January 2019

Using a very broad
brush, the Leave vote represented
the votes of two groups: social conservatives who felt threatened by
immigration, and the group often referred to as the left behind. Both
groups were sold snake-oil by the Brexiters. There would be more
money for the NHS, we would avoid a flood of immigrants coming from
‘about to join’ Turkey, we would get the easiest deal in history
with the EU (because we held all the cards), and we would get lots of
advantageous trade deals that the EU were not able to make on our
behalf. To mention just a few of the lies that were told to sell
their snake oil.

Their lies were
gradually exposed over the two years following the referendum vote.
There would be less money for the NHS, and even with the money it has
they cannot hire enough nurses or doctors because EU citizens no
longer want those jobs. Turkey didn’t join, and the EU will not
give us all the benefits we had as members. Mr. Fox has not even
managed
to replicate third party trade deals we have enjoyed as a result of
being in the EU, for the simple reason that the EU have a lot to
offer and great experience at doing trade deals and we have neither.

To say ‘but both
sides lied’ misses the point. We knew what Remain was, while the
Leavers sold a prospectus that was false in almost every detail. As a
result, the Brexiters stopped talking about the easiest deal in
history and started talking about No Deal. In fact they
knew
before 2016 that there was no plan they were happy with before the
vote. But because they hate the EU (either because they want a
neoliberal paradise or they are nostalgic Little Englanders who want
to rule the waves again) they have just moved from one set of lies to
another.

The only difference
between the lies they told in 2016 and the lies they tell now is the
scale of disaster they are pretending will not happen. Leaving in a
controlled and partial way would hurt business but they would get
time to adjust. Leaving suddenly and completely has business in an
absolute panic, and consumers
as well as workers would soon feel the impact.
The snake-oil sellers are unmoved: just more ‘Project Fear’ they
say. In addition our political influence in the world, already
severely dented, would crash to zero under No Deal. No worries, say
the snake oil sellers, we stood alone once before, as they endlessly
churn out utterly misplaced WWII analogies. (This is only possible
because none of them actually lived through WWII, but instead just
remember santised histories and films.) As David Heniq says,
that this is happening is political failure on a grand scale.

In US popular
culture,
snake oil sellers peddled their wares in Wild West medicine shows. In
the UK they do so in much of the press, and relentlessly in the
broadcast media. Even when BBC journalists know their claims are all
garbage, most are too frightened to challenge them because they fear
being picked out as another example of Remain bias by the right wing
print media. Brexiters have all the time in the world to appear in
the media because they do not need to analyse policies. They just
pick up the latest sound bite and off they go.

No Deal is like
someone who hates modernity but cannot work out why, and so retreats
to living as a hermit in a cave. It will not last long. No country on
earth wants no trade deals, which is why recent history is all about
new trade deals being done rather than undone. Just as Lexiters talk
of deals with Bolivia and other countries that have ‘true
socialist’ governments, the Brexiters end state is for the UK to
become an unincorporated territory of the US. Ask the people of
Puerto Rico what that feels like.

Why do so many
of the public still believe these lies, when it is obvious that these
snake oil sellers lied, or to be too charitable got it so wrong, in
2016? Being fooled once is understandable, but twice in such quick
succession? Well not all those who vote Leave are fooled. In
particular, a few of the left behind group have switched to Remain,
and others in that group can see that No Deal would hit them hard.

But a remarkable
number of 2016 Leavers still back the snake oil sellers. One reason goes back to the
media. The Brexiters pretend that Remain told as many lies as they
did in 2016, and that 2016 Project Fear has been proved to be such,
and unfortunately too many in the broadcast media believe this. In
reality, most forecasters got the decline of GDP and real wages as a
result of the referendum over the last 2+ years roughly right.
As often happens, the media’s narrative and reality are very
different, because the media does not talk to experts.

However a misleading
media narrative is not the only cause of popular belief in the
virtues of No Deal. We have, I fear, a UK example of Trump support
syndrome. Many of Trump’s supporters accept that he lies all the
time but still support him. They believe that Trump supports their
identity and values. Social conservatives feel threatened
by multiculturalism, by social liberalism, by feminism (no dealers tend to be men), by the green
movement. They also tend to be nostalgic for an old order. What
better figure to represent all that than Rees-Mogg. Of course the old
order they remember involved an industrialised economy with strong
unions and a strong welfare state, while a No Deal UK run by the
Brexiters would be a completely service economy with few unions and little welfare state. This is an irony of No Deal: its supporters are nostalgic for a pre-neoliberal past while its leaders want to give them even more of neoliberal modernity.

These Brexiter leaders are
like the Republicans in the US they so admire: politicians armed with
an ideology who know little about the policies they peddle and the
reality
these policies would change. What they do specialise
in is selling policies. The rest of the Conservative party may be too
attached to business to swallow No Deal, but they were happy to enact
austerity and the widespread use of sanctions
for benefits. There may be some obvious liars
who lie about lying, but more generally there is a party that
continues to pretend that stopping money to the poor has nothing to
do with an explosion in food bank use. The One Nation Tories of old
are almost gone, and have little future in a party whose members, as
Tim Bale explains,
are obsessed with Brexit and mostly want No Deal.

There will always be
people who buy snake oil, particularly if it is linked by its sellers to medicines of old. If real snake oil sellers still existed
today they would be banned from touting their wares. The mechanism we
used to have to keep these people out of politics was a critical
media, but most of that media today seems either to be advertising
the benefits of the snake oil, or incapable of challenging the snake oil sellers’ claims. The consequence of letting these charlatans
run loose with no checks on the
lies they tell is a country stockpiling
food and medicine, and preparing to put troops on the streets, for no other reason but that too many people bought snake oil.

Thursday, 17 January 2019

Someone may have
done this elsewhere and probably with more accuracy, but I hadn’t
seen it so I thought I’d work through the numbers myself. Suppose
parliament breaks down into five main factions, with a very
approximate indication of their size.

Brexiters - No
Deal 100

May loyalists - No
FoM 200

People’s
Vote 150

Corbyn loyalists 30

Soft Brexit 150

You can see how
Tuesday’s vote worked out. May’s block alone voted for her deal,
while all the other blocks voted against. Note also that the soft
Brexit block have no quarrel with the Withdrawal Agreement as such.
It is the political declaration about what the UK tries to do after
Brexit that they want to change.

The unusual feature
of this game is of course that if no other block can get a majority
by the end of March, the Brexiters win because the UK leaves without
a deal. So the race is now on to get a majority. As we have already
seen, May’s deal which effectively ends Freedom of Movement cannot
get a majority, because the Brexiters who she courted for two years
have turned against her (as they always would).

If May really did
try and get a deal for a softer Brexit she would probably get enough,
although many Labour soft Brexiters might be reluctant to sign up to
anything that came from her. In addition the DUP could end their
support for her government, and she might lose a few from her block.
A more subtle move is to release her block to vote for something
organised by Labour and Tory MPs. That is probably the best chance
for a winning coalition, but May has until now proved too stubborn
and too partisan to try it. Alternatively she could agree to a second
referendum between her deal and Remain, which the People’s Vote
block would vote for even if the proposal came from her, but she
might still lose the DUP’s support. Sam Lowe and John Springfield
have a discussion of May’s options here.

Another possibility,
raised in my last post,
is that the soft Brexit group and the People’s Vote group unite by
offering a Remain vs Soft Brexit referendum. This would have a
chance, particularly if Corbyn supported it. It seems clear that the
second referendum block cannot win on their own (despite my best
efforts to suggest that is the right way forward) while the soft
Brexit possibility is still around.

That will be one
reason why Corbyn will not declare quickly for a second referendum.
So if May remains stubborn and if soft Brexit and People’s Vote
fail to combine, we get into a war of attrition. To see which blocks
are most durable, we need to think about what happens on the week
starting 25th March. [1]

At that point, if no
majority is formed over that week, we get No Deal. That tells you
that the Brexiter block is the most durable (something May seems
unable to understand). In that week May will undoubtedly try to push
her deal through as the ‘not a No Deal’ option, but equally MPs will counter with a revoke A50 amendment. The latter possibility
tells you that the People’s Vote group and May are more durable
blocks than those advocating soft Brexit, because they have something
to hope for in a last minute panic. That in turn means that the Soft
Brexit block need to get a winning coalition sooner rather than
later.

All this assumes that No Deal remains on the table. The only way it could get taken off is for parliament, or May and parliament [2], to commit to revoking Article 50 at a date close to leaving. If that happens we get a new game, because most of the Brexiter block would revert to May's corner, but equally other blocks would become more stubborn. But if this analysis is correct, it suggests she has a better chance of getting a majority for a slightly softer version of her deal if she took No Deal off the table.

This is almost
certainly wrong and incomplete, and I’m more than
happy for people to tell me why.

[1] It would
probably be before that date, because whoever wins and stops no deal
will need an extension of A50, and the EU may need some time to agree
to that. But the EU will probably not grant an extension unless the
UK has made up its mind, if only because they believe the threat of
No Deal is needed to get the UK to make up its mind.[2] Thanks to @SpinningHugo for reminding me that May cannot revoke A50 alone.

Tuesday, 15 January 2019

A number of MPs seem
to think so. Their argument goes as follows. Although the Withdrawal
Agreement (WA) is not about trade (beyond the backstop), and trade is
dealt with in the Political Declaration that is not legally binding,
a vote for Theresa May’s deal will be taken by her as endorsing her
wish for a hard Brexit. In that case parliament should instruct the
government to pursue a much softer Brexit now, because it is better
to do that now than later (especially if later never happens).

Indeed it is
plausible to argue that the current impasse in parliament would not
have happened if May had gone for a soft Brexit (something close to
BINO: staying in the Customs Union (CU) and Single Market (SM)) from
the start. That, it could be argued, was the appropriate thing to do
when the vote was so close. Another way of putting the same point is
that there may not have been a majority for Leave at all if it had
been clear that this involved leaving the CU or SM.

The narrow vote
for the Welsh Assembly in 1997 is an interesting example in this
context. It was even more narrow (it was won by 50.3%). As a result,
according to this thread
from Richard Wyn Jones, the winners went out of their way to involve
some of the losers in the discussions about how the Welsh Assembly
would work. [1] So if May had thought about uniting the country
after the 2016 referendum she would have proposed some form of soft
Brexit. Instead she tried to unify her party rather than her country,
and the rest is history.

Although trying to
unite the country would have been the right thing for any good Prime
Minister to do (as May will probably find out today), I think the
implication that subsequently a soft Brexit would have passed a vote
in parliament is less clear. We return again to the critical point
that a soft Brexit is not a compromise between a hard Brexit and
Remain. Something like BINO is, for Leave voters, worse than Remain,
because it gives away sovereignty compared to Remain with nothing
gained in return.

Soft Brexit is
Brexit in name only, and assuming Article 50 would still have been
triggered there would have been two years during which Brexiters
would have kept telling us that a soft Brexit is pay and obey with no
say. And for once they would have been largely right. For a country
as large as the UK, having an external body choose your regulations
and trade deals when you have no say in that external body is a big
deal. It is the opposite of taking back control. I do not think soft
Brexit could have survived public scrutiny over two years.

This has important
implications for attempts in parliament to modify the Political
Declaration to commit to a soft Brexit before passing the WA. I can
see the attraction for many MPs: it would be the same attraction it
would have had to a statesmanlike PM after the 2016 vote. But there
is a distinct danger that the public will end up hating it. Remainers
obviously, but also most Leavers who will feel that they have been
cheated by parliament.

If you are one of the
MP’s going for this option and think I am wrong, there is an
obvious way forward that could get us out of our current impasse. (I
first heard this idea from @SimeOnStylites.) Combine your forces with
those going for a second referendum in the following way. Propose a
referendum between some form of soft Brexit (softer than May’s
deal) and Remain. That proposal could command a majority in the
house, and would still give people the option of throwing out the
idea if they preferred staying in the EU. [2]

[1] This all came to light in a rather amusing way. May included
this vote as part of her speech yesterday on why parliament should
support her deal. She ‘forgot’ that despite the referendum result
the Conservative party - including herself - voted against the
Assembly being adopted after the vote! This illustrates why all the talk of the democratic need to respect the 2016 referendum by May and the Brexiters is just an excuse to enact a policy they want. Full
story here.

[2] Of course Brexiters will complain, but they will complain just as
much if the soft Brexit option is passed in parliament anyway.

Saturday, 12 January 2019

This post not about the main part of this address,
although as its my area and interesting I may write about it later. Instead I’m
going to talk in a non-technical way about its premise, because that
alone has implications that may be well known among economists but
not elsewhere. The following is based on his presentation.

Should governments
worry about temporarily paying for things by borrowing? One standard answer is
yes, because although nothing obliges government to pay off this extra debt
(it can be rolled over), it has to pay interest on that debt which
requires higher taxes. If the government didn’t raise taxes to pay the interest
on the debt, but instead just borrowed more to pay the interest, you
would enter what is sometimes called a debt interest spiral, where
debt goes up and up and eventually explodes.

But does a slow
explosion in debt matter if the economy is also growing? A government
(like a firm of individual) should look at debt as a ratio to its
ability to pay, and the easiest way to do that is to look at the debt
to GDP ratio. A company would not worry about increasing debt if its
profits were rising even faster. For a given stock of debt, its growth
rate is given by the rate of interest on the debt. So GDP rises
faster than debt if its nominal growth rate (real growth plus
inflation) is greater than the rate of interest on that debt. In
shorthand, g > r.

Typically economists
like me tend to assume that this is not true, and instead r > g.
But the starting point for Blanchard’s lecture is that currently,
and on average in the past, g > r. There has been only one decade
since the 1950s when this hasn’t been true, and that is the 1980s
when governments were pushing up interest rates to bring inflation
down. Most of the time g > r. So the fact that g > r today may
be the rule and not an exception.

Why do economists
typically assume r > g when the opposite has generally been true?
One answer is called financial repression, which is a label given to
attempts by governments in the past to keep interest rates ‘artificially low’
in conjunction with various credit controls. The idea was that in a
financially liberalised world where interest rates are used by
central banks to target inflation there will be no financial
repression, and real interest rates will be higher. So it made sense,
the argument went, to assume r > g from now
on even though g > r in the past. However what economists call
secular stagnation suggests that the average interest rate required
to keep inflation constant has actually been steadily falling, so
Blanchard’s findings become relevant again. There is plenty of
scope here for more research and debate.

So if normally g >
r, does this mean we do not need to worry about debt? Not quite. What
it means is that one of the standard objections to raising debt,
which is that taxes will have to rise to pay the interest, no longer
holds if g > r. If g > r the government can borrow to pay the
interest, and yet the debt to GDP ratio will still gradually decline,
because the economy is growing faster than debt. The objection to
raising debt that taxes will have to rise in the future to pay for it
disappears. Indeed the whole ‘burden on future generations’
objection to raising debt falls away, because the debt to GDP ratio
declines by itself: there is no future burden.

An important
proviso, however, is that we are talking about one-off increases in
debt. Such one off increases would include, for example, increases in
debt to build new public infrastructure or increases in debt caused
by fiscal expansions to fight a recession. g>r does not mean we do
not need to worry about persistent primary deficits (by which I mean
spending permanently higher than taxes). A persistent primary deficit
will add to the growth in debt, so the debt to GDP ratio will rise
despite g > r.

This is just the
starting point for Blanchard’s lecture, and if you are an economist
I recommend watching it as it is very easy to follow. In policy terms
I think it is the last nail in the coffin of what Paul Krugman calls
the deficit scolds. Those who argued for austerity because of the
burden on future generation, although on weak ground even if r >
g, find their argument collapses if g > r. [1]

[1] Blanchard shows this remains true even if there are periodic shocks where r > g, as long as on average g > r.

Wednesday, 9 January 2019

We are probably
about to take the huge step of leaving the EU that a majority of the
population no longer want. We will do so because certain political
forces have elevated a rigged, corrupt and unfair vote into something all
powerful, that demands to be obeyed. If you doubt this think of all
those who claim a second referendum would be undemocratic: a
statement which is a contradiction in terms unless 2016 has some
unique, special status. The purpose of this post is to argue it does
not deserve this status.

The UK is a
representative democracy that very occasionally holds referendums.
Although referendums have been reserved for constitutional issues, it
is not the case that constitutional issues are always decided by
referendums. Instead they often tend to be used by governments to put
to rest major internal debates over constitutional issues. Cameron
promised to hold a referendum on EU membership in order to
(temporally as it turned out) silence internal debates within the
Conservative party.

I discussed why the
referendum was badly designed here.
Leave were not required to settle on a particular alternative to
being in the EU: EEA membership (Norway), being in the Customs Union
or not, being in the Single Market or not etc. For that reason Boris
Johnson can claim
that leaving without a deal is closest to what Leavers voted for even
though No Deal was never proposed by the Leave campaign. This lack of
specifics also made it easier for the Leave campaign to spin
fantasies like ‘the easiest deal in history’.

The result of the
referendum would have its impact on two main groups above all others:
UK citizens living in the EU and EU citizens living in the UK. The
only people in that group allowed to vote were UK citizens living in
the EU and registered in a UK constituency less than 15 years ago.
However Commonwealth citizens resident in the UK were allowed to
vote. In the 2014 referendum on Scottish Independence EU residents
were allowed to vote. How do you describe excluding UK residents who
would be most affected by a referendum as anything other than rigging
that referendum.

Vote Leave broke
election law in at least two ways,
yet neither of the main political parties seem to care (one for
obvious reasons, the other less so). We still do not know whether the
Leave campaign was funded by Russian money or not. To dismiss this by
saying the extra spending probably didn’t influence the result
misses the point. If all that happens after one side breaks spending
rules in an election is a fine then we are on the road to US style
elections where money plays a very big role. That in turn leads to a
plutocracy of the kind I describe here
and which Jimmy Carter has recently talked
about. The penalty for overspending has to be very large, and the
obvious penalty is to cast doubt on the validity of the vote. Rather
than speculate on whether law breaking influenced the result, we
should just say the vote was corruptly won.

But there was a much
deeper unfairness with 2016 than Leave campaign spending, and that is
the behaviour of much of the media. Most of the right wing press
effectively groomed their readers long before the referendum with
constant stories,
often simply false, of an interfering Brussels bureaucracy: so much
so that the EU set up a website to correct untruths. During the
campaign most of the right wing press (80% by daily readership) were
effectively part of the Leave campaign, providing what is best
described
as propaganda. The influence of the press was particularly important
because, unlike a General Election, most people before the campaign
were uninformed about the EU. This propaganda might have been
counteracted with information provided by broadcasters, but the BBC
in particular decided to balance truth with lies. Elections where information is replaced by propaganda are not fair.

For all these
reasons 2016 was not a free and fair referendum. But the same
political forces that had championed Leave in the campaign went about
deifying the (narrow) victory. Brexit quickly became the ‘will of
the people’, as if the 48% who voted to Remain - and especially EU
residents whose future was put in doubt - had either ceased to exist,
or have become
traitors. This alliance between Brexiters and the right wing press is
the main reason why support for Leave has stood up despite everything
that has happened since: who wants to be a traitor? An indication of
how successful this continuing campaign has been is that if you ask
people about how the economy has been since the vote, they will probably
mention first the pre-vote Treasury short term forecast that
predicted a recession, rather than actual events like the fall in real
wages caused by the Brexit depreciation.

Once it became clear
that the Leave campaign’s claim that the EU would allow us to
retain the benefits of being in the EU after we left was pure
fantasy, it was natural
for the Brexiters and most of their press allies to migrate to
advocating No Deal. It is the only outcome that might give the UK
some more sovereignty (or perhaps US regulations), albeit at a
terrible economic and political cost. Project Fear easily transfers
to what might happen with No Deal.

In a rational world,
and dare I say in any real democracy, the possibility of No Deal
would be eliminated with ease by MPs, who would simply mandate the
executive to Revoke Article 50 on March 27th if no other way forward
had been agreed. That this has not been done, and all sensible MPs
dare propose (and narrowly
win) is something weaker, is indicative to the hold that the 2016
referendum still has on MP’s attitudes.

When this is all
history will people struggle with how a narrow victory in a rigged, corrupt and unfair referendum could lead MPs to vote for a Brexit that a far
greater majority of people no longer want? Not really. It is pretty
obvious how people with lots of money to spend combined
with extreme neoliberals and little englanders to subvert the
political process in the UK. Just add to this a tendency of too
many on the centre-right to appease the far right, from Cameron who
allowed a rigged referendum that was badly designed to May who
constantly set policy to please the Brexiters in her party, and you
get the subversion of democracy that is Brexit

Sunday, 6 January 2019

Just as Brexiters
have heavily influenced the way the mainstream media understand
Brexit, so Lexiters have heavily influenced the way those in the
Labour party understand Labour’s policy towards Brexit. In both
cases we have an argument based on ideology dressed up with spin
designed to persuade others.

The main focus of
this post is the argument that Labour has to support Brexit because
otherwise it will lose lots of seats in any General Election. But I
want to start with state aid. This idea that the EU’s state aid
rules would hinder Labour policy has a structural similarity with the
famous £350 million a week claim of the Brexiters. The debate then
focuses
on how much of the idea is true, just as the Brexit debate was about
how much we paid to the EU. But in both cases we are being led to ask the wrong
question.

In the Brexit
campaign the debate should have been about whether the public
finances would deteriorate as a result of Brexit, rather than by how
much they would improve. In the case of Lexit the debate should be
whether the state aid that a Labour wants to do that the EU would
prevent would benefit the economy by enough to more than offset the
loss due to lower trade and general chaos if we leave with no deal.
Why no deal? Because being part of the EU Customs Union is sure
to be accompanied by restrictions on the use of state aid. So, just
as with Brexit, the Lexiters goals can only be accomplished by
forsaking any kind of close economic relationship with the EU.

There is far less
analysis of this more appropriate question, probably because any reasonable analysis
would conclude that the costs of tearing up all our trade agreements
with the EU far exceeds any benefit from a bit of extra state aid.
Some Lexiters respond to this by trying to discredit the science of
gravity equations: occasionally in a manner that is simply laughable.

Lexiters, and also
many others, were on more solid ground when they argued immediately
after the referendum that Labour had to support Brexit to win another
General Election. Triangulation was suddenly fashionable on the left,
and it worked perfectly in 2017. Because Labour were officially
supporting Brexit, May was unable to make the debate all about
Brexit. But because Labour talked about a Brexit that did no economic
harm, they also captured the Remain vote.

The key fact from
the referendum was that the Remain vote was concentrated in large
cities rather than small cities and towns, so something
like 60% of Labour constituencies voted Leave. But public opinion
has changed since the 2016 referendum. That change may not be large,
but it is enough
to shift many previously Leave constituencies to Remain.
Some analysis
suggests Remain constituencies are now in a slight majority, and in
addition that a majority
of marginal seats also support Remain.

There is a second
factor that weakens support for Leave. We are now talking about
specific and realistic ways of leaving, rather than the fantasy of
your choosing promoted by the Leave campaign in 2016. It is not at
all clear that Leavers who want No Deal should prefer May’s deal to
Remain and vice versa. Reality has taken the passion out of many
Leavers. In contrast, a long campaign against the odds has helped
increase the passion among many Remainers, and it is now Remainers
rather than Leavers who are more determined to vote in any second
referendum.

You can see this in
a poll
undertaken by YouGov [1]. It asked the following questions, with the
total Conservative and Labour percentage vote in each case (don't knows included in total but not shown).

Con

Lab

If there were a general election held tomorrow, which party would
you vote for?

26

24

How would you vote if there was another general election before
the UK leaves the EU and the Conservative Party support going
ahead with Brexit, but the Labour Party and the Liberal Democrats
are opposed to Brexit?

31

25

How would you vote if there was another general election before
the UK leaves the EU and the Conservative and Labour Parties both
support going ahead with Brexit, and the Liberal Democrats are
opposed to Brexit?

28

16

Labour opposing
Brexit does shift some votes from Labour to Conservative, but this is partially offset by some Remainers switching to Labour, meaning that the
Conservative lead does increase from 2 to 6 if Labour declares
against Brexit. However if Labour declares for Brexit, Labour’s vote
collapses, giving a Conservative lead of 12.

These numbers should
not be taken as a realistic projection of what would happen, because
voters are primed to think about Brexit alone rather than other
issues. (They are also primed to think about switching from Labour to
the LibDems, rather than Greens for example.) But what this poll does
indicate is that the number of Remainers Labour would lose by
enabling Brexit is much greater than the number of Conservative
voters they would attract, and the number of Leavers they would lose
if they declared against Brexit.

The poll also shows
(contrary to some claims by Remainers) that Labour’s current (as of
mid-December) strategy of ambivalence is the optimal one in terms of
maximising their vote. As in 2017, being formally for Brexit but also
being either the best chance of stopping Brexit or of getting a softer Brexit, is a vote winning strategy, exactly as triangulation theory
suggests it should be. But if Labour are forced to choose, as they
may well be this month [2], this poll shows that the Lexiter argument
that to maximise their vote the party has to choose supporting rather
than opposing Brexit is not supported by the evidence we have.

[1] Should we discount this poll because it was paid for by a Remain organisation? This is what Brexiters often do to discredit evidence. The poll would only be suspect if it was carried out by a non-reputable company, or if the question asked was a leading one. This is why I have included the exact question in this post. On when who funds research matters see here.

[2] Some Remainers
also claim that Corbyn has already failed to stop Brexit. I can see
no good evidence for this claim. However if the leadership
recommended or even allowed abstaining on a crucial vote that allowed
Brexit to happen, then Brexit would quite rightly be seen by
Remainers as enabled by Labour, because by abstaining Labour were
critical in allowing Brexit to go ahead. This is confirmed in a follow-up poll to the one discussed above released today.